Using the Local Purchase Percentage Field

Introduction:

Local Purchase Percentage is one of the most frequently misused fields. This article describes what the Local Purchase Percentage is used for and when it should be set to a setting other than the default.

Detailed Information:

Local Purchase Percentage describes the amount of the Direct Effect or the Event values that will be applied to the Multipliers. Thus the Local Purchase Percentage field is applied before Indirect or Induced purchases are calculated. Most of the time the Study Area Region has been selected on the basis of where the Event is taking place, thus by default in almost every situation the Local Purchase Percentage should be 100%.

A Local Purchase Percentage of 100% thus means that all the Industry Sales are occurring within the Model region and all the Employment occurs within the Model region.

By definition in Input-Output, Employment is at the site of work, so all employees, regardless of where they live, are counted as employment for the region if they work at a site within the region.

Considerations of where an employee lives are taken into account by means of the Employment Compensation and Proprietor Income fields. (Please see the Related Articles section on the topic of Commuting).

To help envision this more clearly, we can take a look at a quick example to see how the software uses Local Purchase Percentage.

An Event for Sector 12 Dairy Farming has shows the following:

Industry Sales: $1,000,000

Employment: 6

Employment Compensation: $77,067.72

Proprietor Income $4,959.65

If Local Purchase Percentage is set to 50% then the Direct Effects will be $500,000 of Output and 3 jobs. Why?

To calculate, the software first multiplies the Industry Sales value by the Local Purchase Percentage ($1,000,000 * 0.50 = $500,000)

The software then recalculates the Employment and Labor Income based on this adjusted Industry Sales value, which is half of the entered value and thus generates half the Employment and Labor Income.

Deflators are applied to adjust the entered value down to the year of the data set. (This makes the dollar values used to calculate the Multipliers equivalent to the entered dollar values).

The resultant value is applied to the Multipliers to determine the Indirect and Induced Effects.

Thus the Local Purchase Percentage does not provide any information about any of the items purchased by the Sector in the Event field. Regional availbility of Intermediate Expenditures and Indirect Effects are determined by the Regional Purchasing Coefficient.

Local Purchasing Percentages (LPP) and Regional Purchasing Coefficients (RPC) are two concepts that are often confused in IMPLAN. The following discussion will help you to understand the differences and potential similarities of these two properties.

LPP is applied in the Event field and it ONLY acts upon the value entered into the Industry Sales field. Hence LPP reduces the value of local sales prior to applying any values to the Multipliers for analysis.

For most analyses the initial change in the economy is the full value entered into the sales field. In fact one of the primary study area and analysis questions is designed to ensure that the region selected for the study includes the industry where the economic change is occurring.

Typically the only time LPP would be less than 100% is when you are examining a spending pattern (in this instance almost all Sectors should have an LPP of less than 100%), in the case of Margining producing Sectors (when the local availability of the producer, transportation, and wholesaler are unknown), or in certain cases when examining tourist spending.

This is the function of the RPC. The RPC and the Regional Sales Coefficient reflect the local availability of locally produced products within the study area. These values are calculated from the trade model for county and state files and with the econometric RPC method for city (by ZIP Code) and Congressional Districts.

LPP is equal to RPC only when the regional availability of the product is unknown. These are the same circumstances as those listed above in the question "When would LPP be less than 100%?"

Usage:

So when would Local Purchase Percentage be set to something less than 100%?

When the entire purchase is not local.

This should be an infrequent occasion, but one classic example is that of airline ticket purchase. Although $850 may be spent on a ticket, the cost associated to that ticket are divided between the point of origination and the destination therefore the total budget spent on airline tickets for a business trip may be $850, but the local airport only incurs half of the associated cost.

This is different than if you were looking at the local sales of an airtransport company.

When Margins are being applied and the item purchased is known (Please see the Related Articles section on the topics of Margins).

You would not want to apply it to a Retail Sector unless some of the Retail Sales entered into the Event were purchased from stores outside the Study Area Region.

Industry and Institution Spending Patterns

Industry and Institutional Spending Patterns start the analysis, not from the standpoint of the sales or Employment of the Industry or Institution, but instead from the budgetary purchases made by the local organization.

Unlike the Industry or Institution itself, we typically cannot say where the production, transport and wholesaling of the items purchased by our target organization was sourced, and we would not want to assume that these are local purchases. Since this methodology, unlike an Industry Change Activity starts not from the Industry itself, but from the first round of Intermediate Expenditures the Local Purchase Percentage on these purchases needs to reflect local availability, thus the Local Purchase Percentage is set SAM Model Value.

This is because we want to reduce the value spent on each commodity based on it's regional availability before applying the values to the Multipliers because we would not want to take into account values spent on importing goods and services in our results.